Assignment
CHAPTER 5
PROBLEM # 24
At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue's current E & P is $60,000, and at the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon. Pam's stock basis is $26,000.
a. How is the distribution treated for tax purposes?
PROBLEM # 27
Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2015, its second year of operation.
Taxable income 330,000
Federal income tax liability paid 112,000
Tax-exempt interest income 5,000
Meals and entertainment expenses (total) 3,000
Premiums paid on key employee life insurance 3,500
Increase in cash surrender value attributable to life insurance premiums
700
Proceeds from key employee life insurance policy 130,000
Cash surrender value of life insurance policy at distribution 20,000
Excess capital losses over capital gains 13,000
MACRS deduction 26,000
Straight-line depreciation using ADS lives 16,000
Section 179 expense elected during 2014 25,000
Dividends received from domestic corporations (less than 20% owned) 25,000
Sparrow used the LIFO inventory method, and its LIFO recapture amount increased by $10,000 during 2015. In addition, Sparrow sold property on installment during 2014. The property sold for $40,000 and had an adjusted basis at sale of $32,000. During 2015, Sparrow received a $15,000 payment on the installment sale. Finally, assume that no additional first-year depreciation was claimed. Compute Sparrow's current E & P?
PROBLEM # 50
Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus.
Assume that the tax rates are 28% for Kristen and 34% for Egret Corporation.
a. How much better off would Kristen be if she were paid a dividend rather than salary?
b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend?
c. If Egret Corporation pays Kristen a salary bonus of $40,000 instead of a $30,000 dividend, how would your answer to (a) and (b) change?
d. What should Kristen do?
CHAPTER 6
PROBLEM # 38
Teal Corporation, with E & P of $2 million, distributes property with a basis of $150,000 and a fair market value of $400,000 to Grace. She owns 15% of the outstanding Teal shares.
a. What are the tax consequences to Teal Corporation and Grace if the distribution is a property dividend?
b. What are the tax consequences in (a) if Grace is a corporation?
c. What are the tax consequences to Teal Corporation and to Grace if the distribution is a qualifying stock redemption? Assume that Grace's basis in the redeemed shares is $90,000.
d. What are the tax consequences in ( c ) if Grace is a corporation?
e. If the parties involved could choose from among the preceding options, which would they choose? Why?
PROBLEM # 43
Silver Corporation has $2,000 shares of common stock outstanding. Howard owns 600 shares, Howard's grandfather owns 300 shares, Howard's mother owns 300 shares, and Howard's son owns 100 shares. In addition, Maroon Corporation owns 500 shares. Howard owns 70% of the stock in Maroon Corporation.
a. Applying the § 318 stock attribution rules, how many shares does Howard own in the Silver Corporation?
b. Assume that Howard owns 40% of the stock in Maroon Corporation. How many shares does Howard own, directly and indirectly, in Silver Corporation?
c. Assume the same facts as in (a) above, but in addition Howard owns 25% interest in Yellow Partnership. Yellow owns 200 shares in Silver Corporation. How many shares does Howard own, directly and indirectly, in Silver Corporation?
Text BOOK: Hoffman, W. H., Maloney, D. M., Raabe, W. A., & Young, J. C. (2015). South-Western Federal Taxation 2016: Comprehensive (39 ed.). Mason, OH: South-Western Cengage Learning.